When you own a small business, you have to be ready for ch-ch-ch-changes! That means that eventually you'll want to switch from a Sole Proprietor to an LLC. The big question is: when?
If your business is growing, it may be time to make the leap. Here's how to know if making the switch is right for you and your business.
Sole Proprietor vs. LLC
If you originally filed as a sole proprietor, you probably knew this day would come. While a Sole Proprietorship is a solid place to start as a new business, it's not the best option for growth.
As a Sole Proprietor...
... you have total control over your business, but your business is not at all legally separated from you as an individual. In the eyes of the law, you and your business are one and the same.
This means that you'll be financially liable if your business is ever sued or you file for bankruptcy (meaning your personal assets are on the line). Taxes might be a bit simpler, but banks are often hesitant to loan money to sole proprietors and you won't be able to have multiple shareholders. A Sole Proprietorship is a good choice if your business is low-risk and low-reward, but you'll want to switch as your business grows.
As an LLC...
... you'll be able to separate your business and personal assets, meaning your personal property isn't in danger if someone sues your business or you file for bankruptcy. With an LLC, you'll be able to transfer money to and from your business and personal accounts with ease and have unlimited shareholders.
If what you're selling is a hobby - being a sole proprietor is great. But if you want to grow your business like.. well, a business.. keep reading!
WHEN to Switch From a Sole Proprietor to an LLC
In short? As soon as possible!
If your business is on the up-and-up or you have some big changes coming down the pipeline, it's time to register as an LLC. The longer you stay a Sole Proprietor, the longer you're assuming the financial risk should you be sued or file for bankruptcy. (Everyone thinks it would never happen to them... until it does.)
The only time I'd maybe recommend waiting is if you're nearing the end of the year. Don't start the process mid-December, just wait until January 1. This will keep your taxes simple and allow you to start fresh in the new year.
If that Sole Proprietorship isn't cutting it anymore, no worries! Switching to an LLC is easy, and it can open up tons of new opportunities for your business.
HOW to Switch From a Sole Proprietor to an LLC
Ready to make the switch? There are three ways to go about it:
Through your state's Secretary of State. This is the cheapest way to make the switch (in most states, anyway), but it's a pretty involved process. You'll complete all the paperwork (either online or physically mail it in) and file each form with its respective department. Remember that you can't pay enough for peace of mind - so while you'll save some money with the DIY option, if you're unsure about the process, hire help! Still, if you want to save a few bucks, it's totally doable! (most states walk you through the process)
Through a company like LegalZoom. With LegalZoom, you provide your information and they do the rest. In just a couple weeks, you'll have all the paperwork you need to file for an EIN, open a business bank account, and get your LLC started.
Through a tax accountant or attorney. Find one you like and provide them the information you need! Simple as that.
Whichever route you choose, you'll save a lot of time by doing your research and getting your paperwork together beforehand. Set aside an afternoon, belly up to your desk, and get it done!
Your business is growing and changing. Keep up!
You don't have to hire a team to keep your business on the up-and-up. In my mini DIY course Business Foundations, I'll teach you all you need to know about researching entity types, registering, opening a bank account, planning for taxes, and so much more - all without outsourcing your financial management. Click here to learn more!
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